Charts, ABC and Benchmarks

Software , ABC and Accounting Concepts

There are a few concepts, when integrated, which will make your accounting system sing and give you a wealth of information. The following article will give you some ideas. If implemented correctly, monthly reports will give managers and associates insight into the totality of the business even while it displays crucial data which analyzes the business being done. And while it takes some forethought and a little time to set up correctly, the operating costs of such a system are the same as a simplified version. Let the computers do the work.

A significant number of all software systems over $1,000 have the capability to accomplish the following design. Certainly sophisticated Enterprise Resource Platforms (ERP) have modules that go well beyond that. But a car can not be driven 120 miles an hour if the engine is not correctly connected to its components, and if the foundation isn’t robust, the maintenance cost to drive 120 mph is much higher.

We wish to incorporate technology which will provide for efficient day to day records, monthly statements, audits and analysis through Activity Based Costing (ABC) principles. This combination forms the foundation. Detailed financial, logistics, human resources, productivity, costing, manufacturing, forecasting and other add-on modules can not work efficiently if at all, if the foundation is not in place so they can be leveraged, downloaded and customized with holistic methodologies without extensive data massaging.

It is always more efficient to reconstitute the accounting function than consume IT and operational departments with workarounds and specialty programming to overcome foundational deficiencies. Avoid the band-aid approach; it bloats methodologies and software code (requiring their own maintenance cost), consumes time, and generally confuses the enterprise. Why do that? If it’s worth doing, it’s worth doing right.

Doing It Right

This illustration brings up a larger point; the cost of confusing an enterprise is inversely proportional to its size. Systems that are difficult to understand, or require workarounds to get from point A to B, dissuade associate engagement. Energy wasted ordering the mess is energy that will never be expended advancing goals and tactics, and results in an opposite and equal frustration level which hurts morale. Never, ever as a manager believe you are making the heroic or brave decision that you must soldier on in some way and overcome foundational hurdles by band-aiding them and sacrificing the long term. Heroics and short-term fixes based on speed and ego have an outsized allure that is disproportionate to the harm they do.

Books like “It’s Not the Big That Eat the Small…It’s the Fast That Eat the Slow: How to Use Speed as a Competitive Tool in Business” instigated misguided business fads that justified introducing products without market research or pricing comparisons, cost and service positioning, and critical engineering components. ‘Fast’ or ‘rich’ are not goals, they are results. If organizations, are going to have a mantra, it would be better to consider something like, “Think slow, execute fast.” Running fast but stupid gets you to the wrong place nearly every time. Don’t be that guy.

Chart of Accounts

Multidimensional Accounts

A two section account number is a basic and essential platform as well as conceptually easy to understand. Computer systems have instituted the multidimensional conceptions which allow a basic accounting number with the ability to add department project, division, segment, etc. sub-accounts as needed. Relational databases and tagging are wonderful things.

Design the chart with blocks of numbers for Balance Sheet and Income Statement sections. Ensure the concepts of departments (business entities and cost centers), and internal transactions are incorporated. Place departments in sub-account sections, along with internal cost centers that will be apportioned across revenue producing or business entities.

Internal Transactions

Reserve sections of account number blocks in each subsection of the Balance Sheet and Income Statement for internal transactions. Then, when reports are designed, ignore or highlight internal transactions depending on the purpose of the report. For example, IRS, shareholder, and public financial statements would all ignore internal transactions. Obviously, the total listing of internal transactions must always be zero, otherwise there is an allocation error.

ABC Utilization

Set up departments and cost centers in order to apportion them using ABC principles. The art is in choosing how detailed and which segments you wish to use. Some accounting systems allow multiple views.

Choose drivers that are detailed enough but don’t require too much work. Also be careful of data drivers that are subject to input error. As an example, I built an ABC model which was administratively managed by one person. Another division built a huge model with a team of programmers and utilizing sophisticated driver models of square footage used by month, overtime logged per person, etc. Their model required 3 administrators each month. Using periodic actual activity measurement, they were surprised to find their model was never as accurate as mine, and almost every month my administrator would contact them with significant allocation errors due to driver computation errors.

The art of drivers is choosing the sweet spot of accuracy and ease of use. Spreadsheet software has made this activity much easier, since it takes relatively little time to load data and suspected drivers, and run a regression on them.

Most software can automatically assign department costs each accounting period. And don’t be afraid to assign costs across other cost centers, which themselves are allocated, if that makes sense to the operation and increases accuracy.

The Importance of Foundation

Introducing separate internal transactional accounting to retain departmental integrity and act as natural checkpoints on transfers is key. ABC performs a similar function. Managing from ABC reports is not only informative, it transforms the operation and perspective of the organization, especially if associates understand the whole picture.

Show me an organization in trouble, and I will show you an organization that does not understand key ABC components. There may be other problems and often are, but unprofitable key products or customer segments are always present that ABC uncovers and demands resolution. I do not know how to manage larger organizations without it. I do not believe anyone else does either.

Accounting software began as automation of manual systems designed by auditing and accounting professionals who knew little of technology. They have evolved far beyond those initial cumbersome attempts. The best in class software can now analyze costs by customer, part and job, with recent costs, one-time allocations, and automatic cost roll-ups. Expect the best of software and refuse to limp along with what you have. It’s out there.